Risk & Compliance

SEC Alleges Insider Trading on Telecom Deal

Traders allegedly made more than $1 million in illicit profits on the April 4 acquisition of General Communication Inc. by Liberty Interactive.
Matthew HellerApril 14, 2017
SEC Alleges Insider Trading on Telecom Deal

One or more unknown traders made more than $1 million in illicit profits by trading in General Communication Inc. call option contracts in advance of its acquisition by Liberty Interactive, the U.S. Securities and Exchange Commission has alleged.

The identity of the traders was not disclosed in a civil complaint filed by the SEC on Thursday but the commission said they used brokerage accounts in the U.K. and Lebanon to purchase the contracts through U.S.-based brokerages in the days leading up to the April 4 public announcement of the acquisition.

The announcement caused the price of GCI stock to surge over 62.4%, making the traders’ initial investment of $48,109 worth more than $1 million.

The SEC has obtained an emergency court order freezing assets in two brokerage accounts. “The timing, size, and profitability of the trades as well as the absence of any recent trading by the accounts in these particular securities make the transactions highly suspicious,” Michele Wein Layne, director of the SEC’s Los Angeles Regional Office, said in a news release.

According to the SEC, traders used accounts at Cedrus Invest Bank in Beirut and Nomura International in London to purchase 1,293 out-of-the-money GCI call options between March 22 and March 31. Two of the option contracts had strike prices of $22.50 while the other had a strike price of $25.

Liberty had made a formal takeover proposal to the GCI board on Feb. 9 and from March 23 through March 31, the parties exchanged proposal and continued negotiations. The deal price of $32.50 per GCI share represented a 58.1% premium over the closing price of $20.56 on April 3.

In response to the deal announcement, the stock closed at $33.39 on April 4.

The SEC noted that the defendants’ positions in two of the contracts represented virtually 100% of the market for those options and, unlike the rest of the market, they did not hedge their purchases of one of the contracts with any sales.